RSS feedsYou don’t need to be Poirot to uncover a fraudster. The warning signs are usually in plain sight and should be enough to get an accountant’s grey cells working.
Setting the scene
A fraudster’s activities will have a knock-on effect with fellow staff these normally show themselves. Someone, somewhere always knows what the fraudster is up to. If fraud doesn’t get resolved, it results in low staff morale and can lead to high staff turnover. Both lead to complaints internally and from clients’ clients.
Fraudsters take advantage of convenient circumstances such as failure to check up on references; no checking for criminal convictions, or regulatory body disciplinary actions; no published code of conduct or policies on the company’s values and behavioural standards; and no enforcement of holidays or cover with work left until the employee returns.
Remuneration heavily based on financial performance may be motivational, but can lead to temptation, particularly if a significant portion derives from bonuses, stock options or other incentives, the value of which is contingent upon the company achieving aggressive targets for operating results or financial position.
A management team under pressure to produce results may give low priority to the control of the business, especially internal controls such as checks to ensure sales are only made to appropriate customers, or posting access to IT systems. They may even decide to override these controls themselves if it helps ease the pressure.
Simple things, such as transactions at weekends, or access to systems using the passwords of absent or former employees merit further investigation.
Frequent changes of legal advisers, auditors, or other advisers may indicate someone is looking for a more amenable and malleable adviser.
Hints of overridden internal controls or unreliable financial information
should be checked out.
Has the company achieved unusually high or unexpected levels of profits or
losses, compared to competitors? Have unusual transactions had a significant
effect on earnings, including the period in which earnings from the transaction
are recognised? Is profit from transactions consistent with cashflow? Is the
quality of earnings deteriorating: is there increased risk-taking with respect
to credit sales?
Suspicious behaviour
Typically fraudsters work long hours during the week and at weekends and
rarely take a holiday to avoid anyone discovering the fraud. Signs that someone
is living beyond their means should set-off warning lights.
Spreadsheet accounting may be common: not using an accounting system to run
reports but downloading data to Microsoft Excel where figures can be
manipulated.
Continuing failure to correct weaknesses in internal controls is a worrying
signal that something is amiss.
Fraudsters can be overbearing or bullying, to discourage being challenged. Is
anyone avoiding you, always in a meeting or leaving when you want to talk to
them? Fraudsters are often over-protective and reluctant to delegate tasks. They
may refuse or avoid promotion. Is anyone showing signs of addiction to alcohol,
gambling, or drugs?
A combination of these traits and warning signs means you may have a fraud problem.
A surveyor who stole £500,000 exhibited all the warning signs for fraud. He was always busy and never had time to meet. His files were pristine, even the hole punches lined-up: they had been prepared for inspection. He drove a new soft-top sports car and never took any holiday.
A bit of digging revealed that one supplier was treated differently to all the others: paid on receipt of invoice rather than after 30 days. The surveyor’s son worked for this supplier and together, the two colluded to bid for and contract non-existent work.
Look for the clues
- Lots of corrections to the cashbook .
- Cashbook entries in different handwriting.
- Pristine-looking records.
- Records not being kept up to date and/or missing supporting documents.
- New/unknown suppliers or suppliers not handled in the usual way, or dealt with exclusively by one person.
- Suppliers that don’t offer the usual discounts or terms.
- Unusual payment terms to suppliers: advance or quicker than others.
- Large number of orders or invoices for a particular supplier just beneath approval thresholds.
- Suppliers with PO Box addresses, residential addresses, the same address as another supplier, as an employee or next of kin.
- Unfolded invoices (ie, not posted).
- Invoices from different suppliers on similar stationery.
- Suppliers with an incorrect VAT number many fraudsters make-it-up.
- A high volume of non-standard journals going through general ledger reveals things are being moved around.
- A large number of transactions coded to: ‘other’ or ‘sundry’ etc.
- Entries in suspense accounts.
Andrew Durant is an MD for Navigant Consulting London
